The strengthening dollar and an unfavorable external environment have been pressuring the lari since 4Q14. The relative stability of US$/GEL at 1.75 over 4M14-9M14 resulted in real appreciation of the lari on the back of currency depreciations among Georgia’s main trading partners. The spike in the US$/GEL rate in November/December 2014 was probably a necessary correction to rectify appreciation of the REER, which had strengthened in previous months. A second correction took place in late January-February 2015. Overall, we believe that depending on FDI/tourism inflows and import performance, pressure on the lari might subside and the US$/GEL rate should remain within the 2.10-2.30 band in 2015.
Appreciating dollar pressuring lari. The improved US growth outlook and looming Fed interest rate increases have resulted in the dollar gaining 19.6% against a basket of major world currencies during 7M14-2M15. The lari remained broadly stable against the dollar until November 2014, strengthening against other currencies. As a result, the lari REER appreciated starting from August 2014. The lari appreciation prompted the NBG to buy US$ 120mn in August 2014 to build up reserves.
